Association for Public Policy Analysis & Management

Demand-side responses to excise tax increases can vary from reduced consumption of the taxed good to tax avoidance and evasion. Supply-side responses include price increases and, in some cases, provision of untaxed or counterfeit (illicit) goods. In the case of tobacco taxes, such unexpected market responses can reduce the efficacy of increasing cigarette taxes toward reducing smoking and raising revenue.

To investigate these issues empirically, we commissioned a large survey of California smokers before (and, eventually but not in this paper, after) a large tobacco tax increase in April 2017. Before the tax we gathered information from respondents on their smoking habits, prices paid, knowledge of the upcoming tax increase, and intended responses. Particular responses we investigate include quitting or reducing smoking, purchasing cigarettes online, out of state, or from Native American reservations, and seeking out other licit and illicit ways to reduce expenditure on cigarettes. We also ask about the prevalence of counterfeit product in the market. For potentially sensitive questions about tax evasion and avoidance, we employ the item count technique (a method shown to improve the accuracy of self-reported behavior) in addition to direct questioning.

We test several hypotheses regarding the expected impacts of demographics, economic factors such as cigarette prices, and behavioral factors related to moral sentiments. Half of smokers intend to act in ways that undermine the public health rationale for raising tobacco taxes. Significant proportions of the smoking population engage in some measures of avoidance and evasion already before the tax (e.g., buying out of state, buying from sellers who did not pay required taxes). There is an apparently low incidence of counterfeit product and sales of single cigarettes (loosies).

The intended tax-avoiding and –evading behavior by some consumers implies that the impact of the tax on smoking cannot be accurately determined by data from tax receipts in licit markets. Once our post-tax surveying is complete, our study will give a more complete picture of actual market responses to the tax increase and discuss implications for policy toward smoking and public health.